All actors in international markets were eagerly awaiting the decision following the U.S. Federal Reserve (the Fed) meeting on Wednesday, July 31. U.S. President Donald Trump's expectation was that the Fed would announce monetary easing as well as a decision to cut interest rates. Yes, the Fed's Open Market Committee (FOMC) meeting resulted in an interest rate cut and balance sheet contraction after August. However, giving a speech contradicting the easing expectations, Fed President Jerome Powell stated that the decision to cut interest rates was for sure not the beginning of the easing of the monetary policy and preferred to point out that as indicators for growth and production in the U.S. economy grow stronger, the next decision could even be a decision to raise the interest rate.
Following Powell's statements, a development very unwanted by Trump took place and the dollar index rose to 99 points. However, Trump was already uncomfortable with the recent rise of the dollar index to the 97-98 band, which was over 93 points a year ago, pointing to a level that further contributed to the U.S. trade wars. While the EU and China were strategizing to keep the value of their currencies low, Trump clearly expressed his discomfort toward the Fed's stance, which is not helping the situation. Thus, following Powell's unexpectedly almost hawk-like messages, the fact that the dollar index rose to almost 99 points and the euro-dollar parity broke the $1.11 band, no doubt seem to have upset Trump.
This is because Trump's biggest expectation is that the dollar would lose some strength, with major currencies appreciating against the dollar and thus the Trump administration gaining maneuvering space in the U.S. trade wars thanks to the depreciating dollar with a Fed giving strong messages that could mean monetary expansion. However, even though he has cornered Trump, let's focus on one of the critical issues Powell pointed out: "We do not make policies to prove our independence." It is a statement that should be read to all economists in golden letters.
Recently, we have seen the Central Bank of the Republic of Turkey (CBRT) locked up, trying to prove its independence through monetary policy preferences due to the attitude of some economists who have recently increased the dosage of criticism to an aggressive level. This process only led to Turkey losing time. Therefore, the CBRT's decision to cut interest rates by 4.25 points is the right step at the right time without further delay. And, it should be continued. Now, let's focus on the future.
Inflation at 8.9% in September
One of the most important topics highlighted by Treasury and Finance Minister Berat Albayrak during his meeting with economic news editors in Ankara last week was the statement that the decrease in inflation and interest rates will accelerate. Considering the risk of embarrassment due to a possible deviation, I see that the possibility that the annualized headline inflation for the end of September, which will be announced at the beginning of October, could go below 10%, and even under 9%. This indicates that another new interest rate cut, following the 4.25 points cut at the CBRT's Monetary Policy Committee (MPC) meeting last week, is not too far away.
Under the coordination of Albayrak, all ministries that make up the economic administration will simultaneously carry out various measures to break the upward trend in inflation and eliminate the stickiness in inflation and concretely apply them over the next six to nine months, including direct control policies. Although it is natural to wait for six to nine months to see the effects of these measures on price and exchange rate stability, as said in the economic literature, some economists have preferred to comment that this effect should have come out in a short period of time or would not at all.
On the other hand, with all the steps and parameters to establish market trust based on the global political-economic developments executed together and President Recep Tayyip Erdoğan's strategy on Turkey's global perception, market perception has started to significantly improve over the last month. We will observe together that the effects of this rapid change and its continued exponential impact on production, growth and employment will accelerate especially after September.
As also stated by Albayrak, the lessons taken from all that happened in the Turkish economy over the last year, all the measures, models to re-establish the macroeconomic balance, all that the economic administration gained in opportunities and skills, has been like a reform process. The growth process, which will later begin depending on the success of this process, on top of leading 2019 toward a positive growth trend, with the investment environment strengthening for 2020, will push all international organizations to revise their Turkey predictions upwards in embarrassment.
